Darren Sissons is managing director at Portfolio Management Corp. His focus is on global large caps.
American Financial Group (AGF NYSE)
- 1) progressive dividend currently yielding 3.1 per cent,
- 2) good balance sheet,
- 3) leveraged to rising interest rates,
- 4) excellent risk management culture as the company didn’t get into trouble during the global financial crisis, and
- 5) dominant player in niche insurance markets including crop, equine and specialty marine.
Keppel (KEP SP)
- 1) progressive dividend currently yielding 3.6 per cent,
- 2) dividend has been raised for 23 consecutive years and should gradually increase moving forward,
- 3) market leader in the construction of offshore oil platforms (the primary business) with exposure to all major offshore oil markets including: Brazil, Caspian Sea, Mexico, Gulf of Mexico and more recently China,
- 4) successful property business (the secondary business) continues to monetize growing prosperity across South East Asian,
- 5) good balance sheet, and
- 6) inexpensively priced due to negative emerging markets and Asia sentiment.
BankUnited (BKU NYSE)
- 1) sustainable 2.5-per-cent dividend yield,
- 2) best in class and extremely strong balance sheet so no liquidity issues expected,
- 3) leveraged to a recovering Florida and to growth in the New York market,
- 4) like all banks it will benefit from rising interest rates, and
- 5) despite the share price run-up since 2011 the company is still attractively priced.
Past Picks: July 25, 2013
BankUnited (BKU NYSE)
Then: $29.90; Now: $32.28 +7.96%; Total return: +10.77%
Fonterra (NZX FSF)
Then: $7.27; Now: $6.00 -17.47%; Total return: -14.88%
HSBA (HSBA LSE):
Then: £733.80; Now: £621.70 -15.28%; Total return: -10.76%
Total return average: -4.96%
Longer term we like the outlook for equities but in the near term we see little value. At present the market is being driven by the competing emotions of fear and greed. Given the low fixed income yields and the expectation of rising interest rates, funds are flowing from low yielding bond portfolios into equities. This fund flow dynamic is pushing equity valuations to high levels. The resulting upward momentum in many cases is being chased by investors, which is always a recipe for disaster.
Here in Canada we can see obvious examples of this momentum trend. Oil stocks have risen substantially this year but we still have a delivery bottleneck so earnings upside is likely capped – i.e. no pipeline to the west coast, oil by rail has proven it is not without risk and the U.S. doesn’t want or need our oil. The Canadian banks have also run but given the high level of indebtedness of the average Canadian, loan growth which drives bank earnings growth, is likely to be weak moving forward. Given the above, the outlook for further Canadian market gains is muted in the near term.
The U.S. is in a better place but it too has its challenges as most sectors have run and valuations are expensive – i.e. look at the run of the U.S. rails or any company in the staples category (e.g. Procter & Gamble or Colgate-Palmolive.)
Europe is also expensive. True, the Eurozone economy is now better but the banks have not been re-capitalized. The Eurozone favoured financial engineering over a direct U.S.-like capital infusion into its struggling banks. Spain for example, a deeply indebted economy, guaranteed Spanish banking debt and thereby artificially created equity. Clearly without functioning banks an economic recovery, GDP growth and or a lower unemployment rate are not realistic near term expectations.
Asia has pockets of growth and is generally cheap in most markets. Given the above, developed economy markets across the globe are long overdue a correction. Prudent investors with a long term outlook will be well rewarded if they reserve some capital to participate in the coming market correction